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Start-Up or Stop: When Innovation Means Knowing How to Let Go

July 23, 2013

​​​​​​​​​As an investor in start-up companies,Phil Morle has to be good at pulling the plug on projects that aren’t working. But even Morle, who through his Sydney-based company Pollenizer co-founds and supports start-ups in the internet sector, says knowing which projects to support and which to let go is rarely as straightforward as it sounds.

​​​“As somebody that makes lots of companies and lots of new initiatives, it just doesn’t get any easier and I can see why companies have this problem all the time, because it’s never quite as black and white as: there is a business there, there is no business there,” he says. “It’s always grey and you’ve got to pick just how grey it is.”

To survive, companies need to innovate; they need to update their products, develop new ones and push their way into new markets. A strong research and development program is essential. But arguably equally important is the ability to cull those projects that aren’t working.

Letting projects go on for too long drains manpower and cash as well as management focus, and can erode a company’s profitability. Witness the Newton, a hand-held computer developed by Apple that was one of the factors that contributed to its loss of profitability in the 1990s. Despite strong indications it was not appealing to consumers, the company stuck with the project for more than a decade until founder Steve Jobs re-joined Apple and canned the project.

“I think we’ve really under-attended to these issues when we’ve told firms: ‘OK do your experimentation',” says Dan Levinthal, the Michael J. Crouch Visiting Professorial Fellow at the Australian School of Business (ASB) and a professor of corporate management at Wharton, University of Pennsylvania.
“That’s the fun part – let’s place these bets. But the downstream interpretation – processing and sorting through those bets – is an enormous challenge and if we’re not good at culling then [we're] just making commitments and tying up a lot of resources that are likely to drive down shareholder return.”

The Renewal Process

Levinthal argues that companies cannot rely on a sustained competitive advantage – the idea that a company will better its competition and continue to be profitable thanks to a single piece of technology it owns, or to its location, or to some other single factor. Rapid advances in technology and the dismantling of trade barriers mean that any competitive advantage a company has will likely last only five to 10 years.
“The world is changing, competitive contexts are changing, perhaps a different way to look at the question of competitive advantage is: how does the firm manage this renewal process?” Levinthal  says.
In a vibrant capitalist system, new companies spring up and others fail, and corporations need to replicate this process internally with their own innovation. While market forces determine the survival of individual companies, within a corporation it’s much more difficult to cull ideas that aren’t working and this is never as clear-cut as it might initially seem.

First, there’s the problem of assessment: how do you measure success and failure?
“The feedback we get when we try these new initiatives is likely to be ambiguous. There are ways in which the technology or approach to the market kind of work, there’s some receptivity to it, but there are ways in which we’re not achieving the goals and benchmarks we might have set for ourselves,” says Levinthal.

The obvious solution is to come up with a more objective way of assessing success, some sort of formula or algorithm, to make assessment operate like a financial markets option, which is either in the money or not. But this isn’t without its own problems: the risk of losing the element of judgment.
“I can make it more of a yes/no thing, but when that happens do you really want to follow through with that? Maybe there are some tweaks that will make the initiative successful, so you probably don’t want to get away from the element of judgment,” says Levinthal.

“There’s an element in which that’s healthy and allows for further experimentation, but such actions may be avoiding the uncomfortable reality that this initiative is not destined for success. I think this tension is a really important way in which these firm initiatives are distinct from a financial option.”

Second, there’s the human element. The leaders of the projects and innovations and their corporate backers can often have their careers – and egos – on the line. Identifying what made a project a failure is difficult. Did the firm’s young stars, who were handed the responsibility for the new initiative, not work hard enough? Or were they not clever enough? Or was the original premise on which the whole project was based flawed? The idea of failure needs to be de-stigmatised.

“On the one hand you need the tough love of saying 'we’ll try these things and we’ll do the culling', but at the same time we can’t figuratively shoot the actors involved; failure has to become a little bit safe,” says Levinthal. “So it’s this difficult balance of being tough on resource allocation, but at the same time you can’t make it stigmatising and career-ending that you were ‘the guy who was in charge of that initiative in China that didn’t quite get any traction’.”

When the Time is Right

Even the problem of how best to use and when to deploy an idea once it’s been developed isn’t straightforward. It’s ironic that much of the digital photography technology that ultimately destroyed Eastman Kodak was developed by the company itself.

“The challenge for Kodak was to actually decide how much they wanted to invest and how quickly to destroy its own market,” says J. Peter Murmann, associate professor of strategic management at the ASB. “After Kodak went bankrupt last year we all know it didn’t do it fast enough.”

And projects that initially look like failures can bring their own rewards further down the track in terms of technical advances. Apple’s Newton, for instance, diverted energy and resources away from Apple’s profitable divisions, but it was the start of hand-held computing, which has since become near ubiquitous with the advent of the smartphone.

“That technology simply was not promising enough at that moment. It was too early,” says Murmann. “They commercialised the technology prematurely.” However, Murmann notes that the experience might have helped Apple subsequently develop its wildly successful iPod and iPhone products.
Sillicon Valley does well with its mixture of high failure rate and occasional success and Levinthal says a challenge for strategic management is to try to replicate that renewal process within an individual organisation.

“There’s a high rate of failure, but the engineers and the money reassemble with the creation of a new entity,” he says. “So you’re getting a quite rapid cycle and occasionally you’re getting a dramatic Google or Facebook kind of success.”

Controlled Micro-Failures

Pollenizer, like many other companies in the tech sector, has tried to make a science of start-ups, to determine the factors and processes that make for a success. Start-ups have to pass through “gates” every three months and demonstrate key attributes or achievements to continue being funded. They follow a process mapped out by the Start-up Genome project, which is trying to create a discipline around selecting which start-ups to continue to support and which to let go.

“It’s important to have the new science of start-ups that we have today, because it just gives you some externality to throw up your passion and determination and stubbornness around something new and give you the conversation in the mirror as a team,” says Morle. “To truly succeed in making something out of nothing, you actually have to have a stubborn determination to make something that’s pretty impossible to do at the beginning.”

Failure doesn’t attract the same sort of stigma in the tech sector as it does elsewhere in the corporate world. Indeed, when some investors in Silicon Valley assess the credentials of entrepreneurs they look for a couple of failures in the past, reasoning that they will have been informative experiences which better equip the entrepreneurs for future success.

The managers at Pollenizer have also tried to de-stigmatise failure, instead coining the word “flearning” – a combination of failure and learning.

“This term failure is just rubbish, because it does suggest something bad has happened,” says Morle, “and actually the learning that’s necessary to discover a sustainable business model comes through as many failures as possible. The process of creating a start-up is as many controlled micro-failures, or flearnings, as you can do in as short a period of time.”​​

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